The first step in succeeding in adjacent business growth is to understand why businesses fail. My years of experience in leading growth in Fortune 100 companies has provided valuable insights into the sources of risk.
Revenue and profit growth, in broad terms, can be accomplished in three major ways: through expansion of the core business, acquisitions, or organic adjacent business growth. Of course, the best option is to expand a company’s core business as much as possible. However, nearly all core businesses eventually run out of steam or are disrupted by competitors, challenging executives to deliver new growth. Grant’s ICG blog post on the research Organic adjacent investments: a better growth strategy than acquisitions confirms what I have observed repeatedly during my 30+ years. Unfortunately many companies lack a successful track record in adjacent business growth. The first step is to understand the sources of risk.
How risky are new businesses?
I selected 24 adjacent business ventures from my experience in semiconductors, printing, displays, life sciences and energy. Each venture leveraged a significant amount (>50%) from the company in talent, technology, channel, brand and so forth. Each had passed a reasonable amount of market analysis, technology validation, concept testing and due diligence. Each secured at least $5M to get the new business venture through incubation, with much larger investments anticipated for market launch and scale up. In total, 17% of the new business ventures were highly successful beating their original business growth goals by 5X or more, 33% were marginally successful and 50% either failed or the company decided to exit the venture before a conclusive outcome had been achieved. Most VCs would love 1 in 5 investments to yield 5X or higher returns. In my experience, most executives in established companies would consider it unacceptable to fail to deliver substantive growth on 4 of 5 attempts.
Unexpected sources of risk drive new business failure
Ironically, the disparity between how VCs and executives in established companies think is at the root of three significant sources of risk in adjacent business growth.
Risk 1: Locking into a rigidly defined business strategy
Adjacent business ventures that had a Rigidly Defined business strategy were 7 times more likely to fail than those that used an Evidence Based approach as shown in the graphic. To be considered an Evidence Based venture, all of the following criteria had to be met:
- The venture had survived at least two or more major scope changes demonstrating the team’s ability to learn and pivot rapidly.
- There was clear evidence that the company embraced experimentation as part of their culture.
- The team was primarily measured on their ability to learn rapidly during incubation and market lauch.
Risk 2: Scaling back increases risk
It is logical for leaders in established companies to minimize risk by scaling back an innovative business idea. However, scaling back an idea often translates to a loss of potential value. Business ventures with High Value objectives were 12 times more likely to be highly successful than those with Incremental Value objectives as shown in the graphic. To be considered High Value, the venture had to meet one of the following criteria:
- 10X performance improvement over existing products.
- 2X cost reduction over existing competitors.
- Redistribute >50% of the profit pool in the target market.
Risk 3: Applying core business metrics and funding too early
Using specific “acceleration” metrics for launched new business ventures leads to higher success. This failure point is the most expensive for the company because it occurs after an adjacent business has successfully completed incubation and has been launched into the market. Executives in established companies often want both rapid return from the new venture and the predictability of a core business. Adjacent businesses managed by core business metrics too early were 7 times more likely to fail than those that were managed using acceleration funding and metrics. The successful ventures met one of the following criteria:
- The venture was self-funded during the acceleration phase.
- If the company was still funding the venture during the acceleration phase, then the expansion of the business was constrained until demonstration of unit economics and other metrics that proved the business was established in the market.
A better approach to business growth
The good news is you can improve the probability of success and reduce costs in adjacent business growth when you address these sources of risk. Which of these sources of risk have you encountered in starting adjacent businesses and what have you done to minimize them? We will explore our answers in future blogs on adjacent business growth.